Richard Green is a professor in the Sol Price School of Public Policy and the Marshall School of Business at the University of Southern California.
This blog will feature commentary on the current state of housing, commercial real estate, mortgage finance, and urban development around the world. It may also at times have ruminations about graduate business education.

Tuesday, December 30, 2008

A month ago, David Stiff of Fiserve informed me, "in general, sales of bank-owned (REO) properties are included in the repeat sales pairs used to estimate the indexes if they occur at least 6 months after a previous arms-length transaction."

There are currently markets in which foreclosure sales make up 40 to 50 percent of all sales. These transactions are almost surely not representative of the housing stock, and so the CSI is currently a biased estimate of house price changes. I admire both Case and Shiller a lot, but they really need to fix this.

These are just personal favorites. One rule: no more than one building per city. There is no particular order to the list

1. Trinity Church, Boston (Richardson). Copley Plaza is among the best urban spaces I know.2. Seagram's Building, New York (Mies van der Rohe and Johnson). It also has my favorite restaurant in it.3. East Building, National Gallery, Washington (Pei) 4. Carson, Pirie, Scott, Chicago (Sullivan)5. City Hall, Philadelphia (MacArthur and Walter) It is a silly, overdone, wonderful building.6. IDS Building, Minneapolis (Johnson again). The rare, iconic, financially successful building.7. Indiana University Campus, Bloomington. This is cheating, but I think IU has the nation's most beautiful college campus. And no, I never went or taught there.8. Eastern Building, Los Angeles (Beelman). The city's best building is a lovely Art Deco number from 1930. The Wiltern Building is special too.9. Coit Tower, San Francisco (Brown and Howard)10. Terminal Tower, Cleveland (Van Sweringen brothers)

Monday, December 22, 2008

The blogosphere likes to take pot-shots at the main-stream media, some of which the MSM has earned. Political coverage is often vapid, and the culture of "balance" ("some say earth is round, others disagree') is often self-satirizing.

But every now and then, the hometown paper here, the once-great and rapidly deteriorating Los Angeles Times, reminds us that there is o substitute for great, shoe-leather reporting. Ken Ellingwood has been reporting the tragic story of Mexico under siegeover the course of the fall. The story is vivid, and could only be told be someone on the ground, with the resources behind him to visit many places and interview many people. This is the sort of thing that only a major news organization could do.

Newspapers used to be closely held by families--the Ochs-Sulzbergers in New York, the Grahams in Washington, the Pulitzers in St. Louis, the Binghams in Louisville, the Chandlers in Los Angeles. When a family owns a business, it needn't worry about quarterly results--it can focus on other values. In the end, we may not all always like those values (those of Charles Foster Kane, er. William Randolph Hearst come to mind). Nevertheless, beyond that fact that technological change is undermining the newspaper business, it would appear that the publicly traded company model for owning newspapers is fundamentally flawed. And heaven help us if we need to reply on the blogosphere alone for news.

Friday, December 19, 2008

Science last February had a special issue on cities. Among the articles was the Bloom, Canning and Fink piece, which ran cross-country regressions that showed (1) that urbanization levels in 1970 did not predict economic growth in the years since then and (2) that urbanization did not Granger cause growth. They therefore recommend that policy makers avoid promoting or discouraging urbanization.

From a policy perspective, I am happy that an article in Science, perhaps the most prestigious place one can publish in the US, recommends the end of anti-urban policies. But I worry that the regressions suffer from mis-specification.

"Every affluent country in the world is urbanized. Among OECD countries, 77 percent of people live in urban areas, and among World Bank-designated high-income countries, 78 percent of people live in urban areas. The poorest two countries in the OECD, Turkey and Mexico, are 67 percent and 76 percent urbanized, respectively. The least urbanized affluent country, Portugal, is 55 or 59 percent urbanized, depending on source. At the same time, the world’s lowest income countries are generally not urbanized: in 2004, the urbanization rate among the World Bank’s designated low income countries was 31 percent. All of the countries with urbanization rates of less than 20 percent, Burkina Faso, Burundi, Cambodia, Ethiopia, Malawi, Nepal, Papua New Guinea, and Uganda, are low-income countries, all with Gross National Incomes Per Capita of less than $660, and most with GNIs that are substantially lower than that.[1] The correlation between urbanization and PPP Per Capita GDP in 2000 was .70. In short, urbanization accompanies affluence."

I continue:

"That urbanization accompanies affluence does not, however, mean that urbanization causes affluence. First, it is worth noting that Latin America and the Caribbean are 77 percent urbanized, and the countries in that region are certainly not among the World’s richest (nor are they in general, among the poorest). There are also very poor countries in Africa--Cameroon, Mauritania, and Senegal--that are at least 50 percent urbanized. All of these countries have per capita GNIs of less than $1010.[2] Hence affluence does not necessarily follow urbanization."

The thing that strikes me is that all rich countries are urbanized, but not all urbanized countries are rich. This suggests to me the following hypothesis: that urbanization is a necessary but not sufficient condition for economic growth. A linear regression does not allow one to test this particular hypothesis.

Within the past two weeks the New York Times has had two reviews (here and here, where you click on the AO Scott video) of it's A Wonderful Life. They point out the real reason to movie is great--it is an extraordinarily dark and in some ways tragic film.

Beyond that, this scene does a great job of explaining financial disintermediation. It is fun to use in class.

Thursday, December 18, 2008

Last week, I picked up my wife (who will join me working at USC--she will be a physician-faculty member at Keck Med School), our two cats and our wine in Bethesda and drove across the country. It was the first time we had done so in more than 20 years, and other than the fact that it discomfited one of the cats (a nervous nelly about life in general), it was quite a lot of fun.

As we travelled I-66 to I-81 to I-40 to I-30 to I-20 to I-10, I couldn't help but admire the remarkable achievement that is the Interstate Highway system. But I also couldn't help but wonder whether it was sometimes overdone.

In particular, the drive across West Texas was striking for its lack of traffic. The speed limit there was 80, and it is fun to drive unmolested at that speed. The scenery is hauntingly beautiful, too. But I wonder whether a 4-lane superhighway is really necessary there. Wouldn't a 2-lane highway with passing lanes on up-grades and limited at-grade intersections do the trick for such places? Or are the network benefits of having four lanes everywhere worth the cost? I don't know the answer to this--perhaps there is some literature? If we are going to spend a lot on infrastructure, we need to think carefully about such things.

The purpose of regressions is to obtain conditional means (or medians), in part so that we don't draw incorrect inferences from spurious correlations. Thus regressions are especially useful when we see a significant bivariate correlation, and then the significance goes away after conditioning on other variables.

But what if the sign on an explanatory variable flips from significant and positive before conditioning to significant and negative after conditioning on other variables? Should we take that negative sign seriously? If the model is specified properly, the answer is yes, but my gut tells me such models are rarely specified properly.

Tuesday, December 16, 2008

We received two potential offers on the same day: offer X, which had a financing contingency, and offer .94X, which was a cash offer. We took .94 X.

The amazing thing is that the offers came within a week of listing the house. Consistent with Levitt's thesis, the agent encouraged us to take one of those first two offers. But there was an identification problem--we didn't need a lot of convincing.

Thursday, December 11, 2008

The White House has become involved in a maneuver to oust yet another top-level holdover Republican appointee. He is Oakley Hunter, chosen by Richard Nixon as chairman of the Federal National Mortgage Association, known as Fannie Mae, the nation's largest provider of housing finance. As boss of Fannie Mae, Hunter has been feuding with Patricia Harris, Secretary of Housing and Urban Development. Largely to appease her, the White House acted last week on a HUD memo urging that an emissary be chosen to end the quarrel, perhaps by bringing about Hunter's "voluntary resignation." The memo named five men as possible mediators, including Bert Lance, but the White House gave the job to Robert Strauss, the President's special trade negotiator.

There is a personality clash between the liberal, Humphrey-style Democrat Pat Harris and Oakley Hunter, a former Republican Congressman from Southern California. Their deeper problems center on policy: Should Fannie Mae retain its semi-independence, as Hunter wants, or should it bow to HUD directives, as Harris insists? Specifically, Harris feels that Fannie Mae is far too concerned about making money—last year its profits rose from $127 million to $165 million—and too unconcerned with stimulating mortgage lending for low-income housing in the cities.

For its first 26 years, Fannie Mae was a Government agency. In 1968 Congress turned it into a private, profit-oriented company answerable primarily to its stockholders, both individuals and institutions. But the President was given the right to fire its directors "for cause," and HUD was granted some powers to limit Fannie Mae's borrowing. It raises billions of dollars a year in private markets and then buys mortgages from banks, savings and loan associations and other lenders, giving them money to invest in other mortgages. Currently, Fannie Mae holds about $34 billion worth of housing debt. In a war of nerves, Harris in recent months has not granted big new borrowing authority to Fannie Mae, but instead has doled it out in dribs and drabs.

Hunter, who earns $140,000 a year, also faces opposition within Fannie Mae's board; of its 15 directors, five are appointed by the President and ten are voted in by stockholders after being nominated by a management committee. Last October, one stockholder-chosen director, Julian Zimmerman, a mortgage banker who was head of the Federal Housing Administration under President Eisenhower, called for Hunter's resignation on the grounds that Fannie Mae's management had grown aloof and unresponsive to both its own board and the Government. In November a motion to censure Hunter barely lost, by an 8 to 6 vote.

The latest crisis was set off because HUD executives heard that Zimmerman and one other anti-Hunter director would not be nominated for re-election at a board meeting scheduled for this Tuesday. So the White House dispatched Strauss to settle the fight and get Hunter's terms for resigning. Meeting with Strauss last week, Hunter talked about quitting in the future, provided that the Administration would guarantee Fannie Mae's "fiscal integrity and independence." Hunter also wanted all of HUD'S authority over Fannie Mae transferred to the Treasury. But Pat Harris rejected any such deal, and so the White House remains in the middle of an ongoing fight.

Saturday, December 06, 2008

There is a rather silly article in today's Washington Post about Obama's choice of people from elite academic institutions from his adminstration. The gist is that while pointy headed professors may be smart, they may not have the other skills necessary to be effective at governing. I will stipulate that there are as many bad people in academia as everywhere else, but good academics have had at times made important and lasting contributions to the US government.

One of those was Edwin Witte. One of the many things that made me proud to teach at Wisconsin was the fact that Witte had taught there. He did take some breaks to be in Washington, where he helped invent the Social Security system. Indeed, he has been called the father of Social Security.

Wilbur J. Cohen, another UW faculty member, wrote the following wonderful obituary.

Many people have referred to Professor Edwin E. Witte as "the father of the Social Security Act." But, in his customary humility, Professor Witte noted that he merited "this title less than many others." In commemorating the twentieth anniversary of the act, Professor Witte said in an address published in the Social Security Bulletin (October 1955):

"Social Security, like most other major social advances, has been the product of the endeavors and work of many people over a long period of time. The contributions made by any one person have been so commingled with those of many others that the end-product cannot be attributed to any individual or group of individuals."

It is regrettable that Ed Witte did not live to participate in the twenty-fifth anniversary of the monumental program he helped to create. He died, at the age of 73, on May 20, 1960 in Madison, Wisconsin, just a few weeks before the law's silver anniversary. Although he had retired at the age of 70 from the university he loved, he worked diligently and consistently up to his final illness. Between periods of hospitalization and convalescence from several strokes, he was teaching, writing, speaking, arbitrating, attending meetings, and advising students. Ed Witte did not know how to retire and stop working. He left uncompleted a book on social security that he had planned for over twenty years and wanted so much to finish. It is ironical that the professor who played such an important role in the formulating of the social security program did not have time to publish a book on it in his lifetime.

To his former students and colleagues, Ed Witte was more than a man with a vast encyclopedic knowledge, more than a person with the unusual ability to draft single-handedly complex laws and reports on a wide range of labor, legal, social, and economic matters. He was a patient and helpful teacher, a man of humility, and a person of absolute integrity.

When Ed was named president of the American Economic Association in 1955, Merlyn Pitzele portrayed him in all his humaneness, generosity, and uniqueness in an unusual word and picture vignette in Business Week (November 26, 1955). Mel measured the man by noting that Witte, despite all his public service, remained a teacher, a man whose first and foremost interest was his students, and one who as an economist really taught 'political economy' now split so sharply among the social sciences.

Ed Witte was not a man who tried to impress anyone. He didn't use five syllable words or fancy concepts so fashionable today in the social sciences. He wasn't able to use mathematical formulas, and he did not invent any new vocabulary to describe prevailing ideas or to theorize about existing institutions. He didn't try to win an argument or to hurt people by showing how much more he knew or how much more he had accomplished than someone else. But he was tenacious in clinging to opinions and principles in which he believed. He was a rare spirit and was admired by his students and colleagues.

Ed Witte was born on a farm near Watertown, Wisconsin-- about 40 miles from Madison-- on January 4, 1887. He received his B.A. from the University of Wisconsin in 1909 in history and his Ph.D. in economics in 1927. Almost all of Witte's life was spent in Wisconsin, except for several brief periods of governmental service in Washington and, during World War II, in Detroit. He spent about half of his active life as a state or federal governmental official and the other half as a university professor. He was proud of his dual role as a public servant and a teacher.

It is important to note that Witte, although growing up on a farm and coming from a rural middle western background, was with Commons, Slichter, Perlman, and others part of a small group of Wisconsin liberal economists who interpreted and defended the trade union when such defense was dangerous. Witte was also a staunch advocate of social security and public health insurance despite attacks on these measures as leading to the 'welfare-state' or 'socialized medicine.' Witte saw himself as both a radical and a conservative; radical in espousing reforms and challenging the status quo; conservative in that these reforms, by moderating abuses, preserved the free-enterprise economic system, the federal-state political structure, and the democratic political process.

He entered the University of Wisconsin in 1905 where he majored in history under Frederick Jackson Turner, the author of the famous frontier hypothesis as an explanation of the unique economic, political and social development in the United States. It was Turner who, on leaving Wisconsin in 1910 for Harvard, advised Witte to study with Commons. Under Commons, Witte combined his interest in economic history with a pragmatic interest in understanding and solving immediate economic and social problems. It was Commons who guided and directed Witte into his life's work.

Witte was part and parcel of the 'Wisconsin Idea' of public service in a period when the University of Wisconsin was pioneering in this field. With Commons, Perlman, the La Follettes, E. A. Ross, the sociologist, Altmeyer, and a number of other distinguished people, he investigated

controversial social problems at firsthand and emphasized the importance of the university in making a major contribution to public policy issues.Witte combined the values and experience of a political economist, social reformer, and historian. He believed in the diffusion of economic and political power. He was influenced strongly by the La Follette progressive movement and worked closely with many of the Progressive leaders and legislators. He identified with the 'little man,' the individual farmer and worker, and the needs of individuals who were unemployed, sick, or aged.

He was often critical of the power of the large impersonal corporation, the political influence of private insurance companies, the control of 'Wall Street,' and the influence of professors from eastern universities in government, business, and labor. Yet Witte was never hostile or bitter to those who were critical of him. He was an optimist and he believed in 'progress.' He saw social and economic institutions in a continual process of change.

The respect for his integrity and humanity was demonstrated by his selection as the first president of the Industrial Relations Research Association (1948) and as president of the American Economic Association (1956). His abilities as a conciliator and mediator among men with strong opinions led him to be used extensively in labor mediation boards. This same quality was instrumental in his being selected to be chairman of the Department of Economics at the University of Wisconsin from 1936-1941 and 1946-1957. Witte's whole approach was to find the area of agreement in economic, labor, and social questions.

Witte was also strongly influenced by his experience with legislators and with drafting legislation and getting legislation enacted into law. As chief of the Wisconsin Legislative Reference Service (1922-1933), he aided countless state legislators on a wide range of legislation. As a secretary (1912-1914) to Congressman John M. Nelson, he had the opportunity to get to know the congressional mentality and the legislative processes in Congress. This intimacy with both the state and federal legislative mind and machinery led him to respect the process of political democracy and to be wary of grandiose schemes which would be impossible of legislative acceptance. In addition to his contribution to drafting the Social Security program, he was also instrumental in drafting the Norris-La Guardia anti-injunction act.

As the executive director and research synthesizer for the President's Committee on Economic Security in 1934, Witte undertook the major responsibility for writing the entire report of the Committee on Economic Security to President Roosevelt and also for explaining and defending the proposed legislation before both the House Committee on Ways and Means and the Senate Finance Committee in 1935. He sat in the executive sessions of both committees, on the floor of the Senate and in the conference committee, helping to mould the technical and legal modifications and policy compromises. Here Witte was exercising the highest art of combining economics, politics, and conciliation in the crucible of hard reality. It is to be hoped that Witte's unpublished manuscript on, "The Development of the Social Security Act," which he wrote in 1936, will soon be published. It presents an accurate insight into the entire legislative process and should become a major reference source for all students of social security.

Although Witte was a prolific writer of articles and speeches, he published only one major book in his lifetime: The Government in Labor Disputes (1932). Social Security in America (1937) represents a summary of the studies and staff reports prepared under his direction as executive director of the Committee on Economic Security. Witte preferred to allocate his energies to the current labor and social issues of the day rather than writing systematic volumes. He gave unselfishly in time and energy to students and to his colleagues. He wrote extensive letters to his students and to anyone who inquired of him. He was conscientious in his administrative and teaching responsibilities and his many advisory roles, which resulted in his constantly postponing the text on social security he hoped so much to publish.

Witte admired and respected Commons and Perlman and was proud of being a member of the institutional school of economists.

In a ringing defense of institutional economics in 1954, Witte defended and explained his approach and his objectives. "All or most of the institutional economists have been pragmatists, studying facts, not for their own sake, but to solve problems and to make this a better world to live in."

Ed Witte is gone, but he made a significant contribution to the labor and social legislation of the nation and to teaching these subjects to students he hoped would carry on the work he loved.

Thursday, December 04, 2008

The federal government can raise long-term debt right now for around 3 percent (actually less--10 year Treasuries are right now yielding less than 2.7 percent). So a 4.5 percent mortgage gives a spread of more than 150 basis points.

If the government-backed mortgages require 20 percent down payments, strong FICO scores from borrowers and full documentation, this is a good deal for the government. The default rate on 30 year-fixed rate, prime, 80 percent LTV and below mortgages remains quite low. Even if life-of-loan default rates for these types of mortgages triple, the taxpayer would earn a positive return on the program. And the value of the call option (ability to refinance) to the borrower would be low, because the program would apply only to purchase money mortgages.

On the other hand, the downpayment requirement, which is essential to making the program sound, will continue to prevent many potential buyers from getting into the housing market. So how effective it would be at stimulating housing demand is questionable.

Wednesday, December 03, 2008

I was listening this morning to a Morgan Stanley investment banker say that in the early part of the decade, companies' stock prices got hammered if they didn't have enough leverage. Now they get hammered if they don't have sufficient cash to pay off any potential bullet loans.

We try to teach that financing should be irrelevant to business valuation (until the cost of financial distress comes into play). We try to teach that as one takes on more debt, the cost of equity should go up just enough to offset the benefit of debt's lower cost. We just must not teach it sufficiently well.

Monday, December 01, 2008

Among my guilty pleasures are big time college athletics. I prefer both college football and basketball to their professional counterparts, and when at Wisconsin, I enjoyed having varsity athletes in class (I begin teaching USC classes this spring, and I assume I will have a similar experience here).

I am also sympathetic this morning to the football players at Texas, who must be upset that a computer formula has placed them behind a team that they have beaten on a neutral field. All that said, I think a playoff system for college football is a bad idea.

The reason is varsity athletes already sacrifice enough for their schools, and seasons have already been extended well beyond what they once were. Forty years ago, a typical college team played nine games a season, and there were many fewer bowl games. Now the typical season lasts 11 to 12 games, and BCS teams with 6-6 records are eligible to go to bowls.

The upshot of this is that it is very difficult for players to actually go to college. Going to college means more than showing up to class and doing homework; it also means interacting with other students (some of whom might not even be athletes!), faculty and staff; it means hearing from outside lecturers, and attending musical performances and plays; it means growing intellectually and learning how to think independently. As it is, varsity athletes have what amount to difficult full-time jobs along with their class obligations, and I think it remarkable when they can just meet their class obligations. Of course, very few college athletes, even at a place like USC, will be able to go on to make a living as professional athletes.

I tell employers that they should jump at any opportunity to hire a varsity athlete who graduated in four years with a B average and a real major. The time management skills of these young women and men is remarkable. They needn't be tested any further.

My family spent its last Thanksgiving in Montgomery County, Maryland this past weekend. Montgomery County has among the ten highest median household incomes of any county in the country, and unemployment here remains low., at 3.3 percent. The county's bond rating is AAA (for whatever that is worth nowadays).

But when we went to White Flint Mall yesterday, the Sunday after Thanksgiving, it was nearly empty. I bought myself an unexpected little gift--a Banana Republic shirt that lists for $79 was selling for $27 (I like their shirts, but I think at list price they charge too much for them). But even with deep discounts, we did not have to wait in line to check out.

Fundamentals are strong here, and yet people aren't buying stuff. Paul Krugman is telling us to turn to Keynes for an explanation, and so I have been rereading the General Theory. It is a slog of a read, but Keynes' insights apply to our time more than those of any economist since his time.